Update to estimated tax expenditures on superannuation

The recently issued 2015 Tax Expenditure Statement (TES) has substantially revised downwards previous estimates of the cost to government of superannuation tax concessions. The use of a revised methodology has led to an improvement in the accuracy of the TES forecasts of this cost over the coming five years.

The tax expenditures figure on a tax foregone basis are now estimated to be $29.8 billion in 2015-16, down from an estimate of $33.5 billion in last year’s TES for the same year. The revisions to later years are even greater, down from an estimated $45.9 billion for 2017-18 to $32.2 billion.

The Association of Superannuation Funds of Australia (ASFA) believes that the most recent estimates are a considerable improvement on previously published data, but there is still significant work to be done to get an accurate picture of the costs and benefits of superannuation tax concessions.

“The estimates now clearly take into account the tax concessions relative to the same investment being held outside the superannuation system,” explained Pauline Vamos, CEO, ASFA.

“If funds are invested outside super in similar assets, they would be likely to attract concessions associated with capital gains and the benefits of dividend imputation, which also involve a cost to revenue.

“The more accurate method for estimating tax expenditures confirms that contribution caps are working and that there is not a prospective blowout in the cost of tax concessions for superannuation. Contrary to what some commentators have claimed, the cost of tax concessions for super is not overtaking the cost of the Age Pension.”

While the recently published estimates are an important improvement, ASFA believes that the actual cost of tax concessions is more likely to be around $16 billion per year, as per the below diagram. The most recent TES notes that the estimates are necessarily only a partial measure of the impact of the budget of the tax concessions for superannuation.

“When you take into account the savings the government makes on the Age Pension as a result of super, and the impact of behavioural change (people shifting money from one tax-effective vehicle to another) that would occur if super tax concessions were removed, a more accurate estimate would be around $16 billion a year,” said Ms Vamos.

With the current legislated settings for the Superannuation Guarantee (SG), expenditure on the Age Pension is projected to reach 3.6 per cent of GDP in 2054/55. In the absence of superannuation savings, expenditure on the Age Pension would be likely to reach 5.5 per cent or more of GDP and retirement incomes on average would be lower.